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UPDATED: City Must Reduce Water Rate to DUD, Chancellor Grants Motion for Temporary Injunction

February 28, 2014

by:

Dwayne Page

The City of Smithville has been ordered by the Chancery Court to immediately reduce its water rate to the DeKalb Utility District from $5.00 to $2.67 per thousand gallons, which a water study last year found to be the city's actual cost to produce water.

Following a two hour hearing Friday in Cookeville, Chancellor Ronald Thurman granted a DUD motion for a temporary injunction barring the city from continuing to impose its $5.00 rate until the city gives proper notice to DUD and justification for raising the rate above $2.67 per thousand gallons. The ruling was only on the motion for a temporary injunction. The lawsuit brought against the city by the DUD is yet to be litigated. The city has agreed not to disconnect water service to the DUD while it is pending.

As part of the ruling, the Chancellor required the DUD to post an injunction bond (as required per Rule 65.05 of the Tennessee Rules of Civil Procedure) of $75,000 to be held by the Court pending the final outcome of this case as security for any damages that might result. This action indemnifies the city against loss in case it is later decided that the injunction should not have been granted.

As a result of Friday's ruling, DUD will immediately reduce rates charged to its customers who receive water that the District purchases from the City of Smithville. As an example, the minimum bill will be reduced from $28.93 for 2,000 gallons purchased to the rate of $22.15. The average District customer purchases 6,000 gallons per month and that rate will go down from $76.88 to the sum of $56.54, a decrease of $20.34.

During Friday's hearing, the Court found that the city violated Section 18-502 of the Smithville City Code, which requires the City of Smithville to give the DeKalb Utility District 30 days' notice in advance of a rate change. The City of Smithville gave the DUD only 16 days' actual notice in advance of the rate change, effective January 1st. The Chancellor also found that the city had not given proper justification for arriving at the $5.00 rate.

The primary reason given by the city for raising the DUD rate from $2.05 to $5.00 per thousand gallons was that this is the rate city customers are paying for water.

Chancellor Thurman further agreed with DUD's argument that the higher rate has caused irreparable harm to the DUD and its customers. As evidence, attorneys for DUD said sixteen DUD customers have already canceled service and they cited one customer's claim that she must now make adjustments in her family budget to pay the higher water bills. Attorneys also claim that DUD's reputation with many of it's customers has been damaged, due to the higher water rate imposed by the city.

Attorneys for the city said the Chancery Court does not have the authority to change the water rate. "It is not within the province of this court to set water rates, even temporarily, for the sale of water by the city to the DUD. This court should refrain from vacating a decision of the city board and substituting its judgment for the broad discretionary authority afforded by the City Board of Mayor and Aldermen. Moreover, even if this Court had the authority to set a temporary water rate as requested, DUD has not met its burden of proof on the required elements for a temporary injunction" wrote the attorneys in their response to the DUD's motion for a temporary injunction against the city.

"The Plaintiff (DUD) seems to be assuming that this court has the legal authority to play the oversight role over the city which the Utility Management Review Board exercises over Utility Boards and that this court will engage in an extensive fact-finding process to determine what the "reasonable" rate should be, but there is no legal basis for the court to do this. Instead, the court's proper role is limited to a review of whether the city's action on December 12, 2013 (setting the $5.00 per thousand gallon rate) was illegal, arbitrary, or capricious, and the Plaintiff (DUD) has alleged no fact indicating that high standard has been met," the city attorneys wrote.

They also argued that despite the ordinance requiring a 30 day notification, the DUD was fully aware that the city had intended to change the water rate, effective January 1st because that is the date when the DUD's ten year water purchase agreement was set to expire. On November 13, the city sent DUD proposals for a new contract and served notice that if the options were rejected, the city would begin charging the DUD the same rate as outside city customers, effective January 1st. The DUD subsequently rejected the city's offers primarily because they required minimum purchase amounts of water.

The city's lawyers further claim that the $2.67 rate determined by Warren and Associates to be the city's cost of producing water was based on the assumption that the city would continue selling roughly the same amount of water that it is currently selling to DUD as its major customer so that the city could recover its capital costs of upgrading the water treatment plant by approximately $3 million dollars over 20 years. "In light of the fact that two-thirds of the city's water business will "dry up" when DUD builds its own facility within two years, the $2.67 per thousand gallon figure set forth in the Warren study becomes inapplicable. DUD has publicly indicated that it wants to continue to have access to the city's water supply and water treatment facilities without an obligation to pay its fair share of the city's capital costs to maintain and improve those facilities. The DUD effectively wants a rate based on capital costs spread over 20 years without committing to purchase its water from the city over those 20 years," wrote attorneys for the city in their response.

"The DUD's failure either to negotiate a contract renewal with the city or to obtain an alternate source of supply in advance of the expiration of the contract, with the predictable result that the city began charging the same rate it charges other customers in the area, reflects nothing more than poor business planning on the part of the DUD. Thus, any damages to DUD are self-inflicted and in no way constitute an "irreparable injury" sufficient to justify a temporary injunction," concluded attorneys for the city.

Attorneys for DUD contend the city's rate of $5.00 per thousand gallons to the DUD represents a 144% increase and is unreasonable and in conflict with a provision of state law which requires that "Municipal utility systems shall charge rates that reflect the actual cost of providing the services rendered and shall not operate for gain or profit or as a source of revenue to a governmental entity".

The city's Warren Study last year determined the city's actual cost of producing water to be $2.67 per thousand gallons. However during the UMRB hearing last April, Jerry Warren of Warren and Associates testified that because there is no transportation costs for providing water to the DUD, the rate could be reduced by as much as 42 cents to $2.25 per thousand gallons.

In their motion for a temporary injunction, DUD attorneys wrote "Based upon the contractual rate of $2.05 per thousand gallons, the DUD paid approximately $632,880 for the water purchased from the city in 2013. By way of comparison, if the DUD purchases the same amount of water from the city in 2014 as it did in 2013, at the rate of $5.00 per thousand, the cost will soar to $1,543,610, an increase of $910,000".

Even at the $2.05 per thousand rate, DUD attorneys claim the city made money off the DUD. Cash reserves were used to pay for the renovation of the Smithville water treatment plant a few years ago and the city water and sewer fund still has zero debt with cash reserves of almost three million dollars and liabilities of less than $234,000.

After the city raised the rate to $5.00 per thousand gallons on January 1st, DUD gave notice to its customers that a rate increase would be necessary for them to help absorb the cost, since state law prohibits a water utility from operating at a loss.

DUD attorneys contend that the city has engaged in a money grab in that they know their largest water customer will be going away after the DUD water plant is in operation and they want to get as much revenue from DUD while they can in order to keep from having to raise water rates to their own customers.

They claim the actions of the city have been arbitrary and capricious and that the Chancery Court does have the authority to intervene in order to stop it.

DUD was represented Friday by attorneys Dewey Branstetter, Jr. of Nashville and Keith Blair. The City's attorneys were Kristin E. Berexa of Nashville and Vester Parsley.